Do you know what the least thrilling job is after commencing your small business project? It’s doing taxes! Business taxations can become an overwhelming task pretty quickly. After all, there are so many elements you need to consider to avoid facing any issues later.
According to terms feed review, an increasing number of people are complaining about taxes being entirely unjust over the past few years. Small business owners especially hate filing for taxes because many giant corporations sport a tax rate even lower than the middle class. That means most of the burden falls on them.
Whether fair or unfair, paying taxes is every citizen’s responsibility. Evading taxes is illegal and can land you and your business in a pretty messy situation. Below, we have outlined a few tax issues every entrepreneur should know.
1. Not filing for self-employment tax
You probably didn’t expect to pay a fee for becoming your boss. However, self-employment tax is a real thing. All small business owners owe an additional 15.3% tax along with their other income taxes. And unlike Medicare and Social Security tax, a self-employed individual must solely bear the entire employment tax charge.
You must be thinking about how and when you will take the time to do all the paperwork for this self-employment tax with your additional responsibilities as a new business owner. The good thing is that you can now hire taxation experts to do the job for you. Look for an experienced, eligible professional for the job for you. With various options available for e-learning, many aspirants opt for online courses to hone their skills with programs such as online LLM tax degrees, etc., which can undoubtedly be a savior.
2. Confusing tax avoidance with tax evasion
Another common issue businesses face is considering tax avoidance and tax evasion as the same. However, in reality, both differ significantly.
Tax avoidance means deliberately trying to keep your taxes as low as possible. It is perfectly legal and compromises lawful methods to minimize your business taxes structurally. Some examples of tax avoidance include depositing your money into a savings account to avoid paying income taxes and investing money in a pension scheme. Even banking on bitcoin and claiming capital allowances for your business assets fall under methods of tax avoidance.
Tax evasion refers to the use of unlawful means to avoid paying taxes. If the authorities catch you, they will immediately start the process and make you pay all your unpaid tax amount together. In extreme cases, they can even press charges on you. Tax evasion, however, is not legal and can land you in jail.
3. Over-reporting business expenses and under-reporting business income
The higher the business expenses and income, the more tax a company will have to pay. Some people often see over-deducting their expenses as an easy solution to paying less tax. Mainly because the IRS considers these as personal benefits and hence, not deductible. You must keep detailed records to prove that all the expenses are indeed business expenses.
With growing technology, hiding income is becoming more and more challenging. It was much simpler to tweak some costs with cash payments and keep the business income low. However, electronic payments now provide an automatic audit and make it nearly impossible to hide any income or expense.
Therefore, to steer clear of any trouble, you must report your business income and expenses fully. The tax authorities might be willing to make some exemptions if your request is genuine and records are accurate.
4. Mixing personal and business expenses
Another usual issue that arises during taxes is the confusion between personal and business expenses. As a new business owner, separating some of your costs from your business expenses might get complicated. However, please keep in mind that tax authorities are usually rigorous against commingling funds.
Keep in mind that only business-related expenses are deductible from income. And to ensure no trouble later, it would help if you kept separate financial records. It means opening a business bank account and using your business’s credit card to make purchases for your office. Also, consider keeping detailed documentation always ready to support your case.
5. Not reporting cash payments
Even though we reside in an era driven by e-transactions now, cash payments are dead yet. In reality, a substantial number of businesses still accept and prefer cash payments. However, when filing for taxes, most companies ignore reporting cash payments to avoid paying high taxes.
However, several countries consider failing to report cash payments as deliberate fraudulent action. As a business owner, you must know that you need to register all income, whether in cash payments or online.
6. Not reporting employees
Suppose you own one of those businesses where you can quickly pay employees under the table. In that case, you might think getting away with taxes would be simple. However, even though detecting employees is challenging for tax authorities, there are still ways you might end up in trouble.
Firstly, the tax authorities might get suspicious about your employees’ tax returns and force them to report your business. In that case, you might have to pay heavy penalties and back taxes. Although unusual, some authorities might consider such behavior as fraud and take it up to court.
Not paying taxes can be highly tempting, but you must be fully aware of the consequences. Things might go south, and getting dragged under a criminal processing case will neither be good for you or your company. Yes, a few businesses never get caught, but it is a risk not worth taking.
Hence, always file for taxes! It shows that you are responsible and promotes your business’s morale and social ethics.